Loring Ward Q3 2018 Market Commentary

Loring Ward’s Asset Class Investing portfolios are strategically invested with a focus on long-term performance objectives. Portfolio allocations and investments are not adjusted in response to market news or economic events; however, we evaluate and report on market and economic conditions to provide our investors with perspective and to put portfolio performance in proper context.

Strong corporate profits, a healthy global economy, and the absence of major geo-political issues in the third quarter resulted in developed stock market gains. For the quarter, U.S. stocks (as measured by the S&P 500 Index) advanced 7.7%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S.) advanced 1.3%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) declined -1.1% as stocks in China and Turkey struggled during the quarter.

As widely anticipated, the Federal Reserve increased its key policy rate by 0.25% in September. The new benchmark target rate is 2.00-2.25%, and that is the eighth rate-hike since December 2015. The Federal Reserve indicated that it is also targeting one additional interest rate increase this year. For the quarter, the 2-Year Treasury rose 0.29% to 2.81%, while the 10-Year Treasury advanced 0.20% to end at 3.05%. This is the highest quarter-end level for the 2-year Treasury since 2007, and the highest quarter-end level for the 10-year Treasury since 2011.

The U.S. Dollar Index, a measure of the value of the United States dollar relative to a basket of foreign currencies, advanced slightly in the third quarter — with the U.S. dollar appreciating by 0.15% compared to foreign currencies. The U.S. dollar is now 2.28% higher than it was 12 months ago.

U.S. Economic Review

Economic growth in the U.S. picked up in the second quarter. The final reading from second quarter GDP showed an increase in economic growth of 4.2%. The September 2018 reading of the unemployment rate was a very low 3.7%, and the tighter labor market has been pushing wages higher. For the 12-months ending September 2018, average hourly earnings are up 2.8%. Domestic inflation remains tame as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, reached the Fed’s target of 2.0% in May 2018 and has remained there since.

U.S. Large-Cap stocks advanced the most during a quarter where all the U.S. stock indexes we track posted positive results. International Value Stocks and Emerging Markets Value stocks posted reasonable gains while International Small-Cap Stocks slightly declined. Focusing on Emerging Markets, we referenced earlier that the broad Emerging Markets stock index was down, but here we show that Emerging Markets Value stocks were positive. The main difference in the results was from China. Chinese value stocks performed well during the quarter, whereas Chinese growth stocks had a very bad quarter.

Bond yields rose across the maturity curve during the quarter, which typically sends current bond prices lower. However, interest earned from the bonds was enough to offset any price declines from rising rates.

In the U.S., large-cap stocks outperformed mid- and small-cap stocks in all style categories. Among the nine style boxes, Large Growth posted the largest gain of 9.2% for the quarter, and Small Value posted the smallest gain of 1.6% for the quarter.

In developed international markets, stocks had mixed results. Large-cap and mid-cap stocks all outperformed small-cap stocks for the quarter. Value performed better than growth in mid- and small-cap stocks, and growth performed better than value among large-cap stocks.

With stocks advancing globally, a diversified index mix of 65% stocks and 35% bonds would have gained 2.6% during the third quarter.

Jonathan Scheid, CFA, AIF

Vice President, Portfolio Strategy & Education, Loring Ward

With over 20 years of experience working with advisors and their clients, Jonathan enjoys sharing interesting perspectives on a wide range of investment and economic topics. He is a key leader on the Portfolio Strategy & Research team focused on helping advisors and investors understand the merits of our investment philosophy.

The views expressed represent the opinions of the author which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as investment advice or a recommendation for any security. While Loring Ward believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the author's view as of the time of these statements. Actual results, performance or events may differ materially from those expressed or implied in such statements. past performance of various investment strategies, sectors, vehicles, and indices are not indicative of future results.